Fall 2014 issue of Horizons

REAL ESTATE

Tax Credit Recapture In the Face of Natural Disaster and Casualty Losses by Peter Aje, CPA

W ith the numerous natural disasters that have plagued various areas of the country over the past several years, ranging from Hurricanes Katrina and Sandy to the Joplin, Missouri tornadoes, many affordable housing projects and their stakeholders have felt the physical and financial effects left in the wake of these events. Among these effects is the possibility of tax credit loss and even recapture. However, there are key differences in the rules surrounding credit loss and an owner’s ability to claim credits depending on the type of casualty event that occurs. Overall, tax credit recapture implications are primarily contingent on the timing of the restoration of the damaged building or units.

Provisions of the Internal Revenue Code Located in Section 42(j)(1) of the Internal Revenue Code, the general rule regarding the recapture of Low Income Housing Tax Credits provides that if at the end of the tax year in a compliance period, the amount of a building’s qualified basis is less than the amount of such basis as of the end of the previous year, then the taxpayer’s tax will be increased by the recapture amount. However, Section 42(j)(4)(E) also provides that, in all cases, “the increase in tax under section 42(j) shall not apply to a reduction in qualified basis by reason of a casualty loss to the extent such loss is restored by reconstruction or replacement within a reasonable period established by the Secretary.”

page 62 | horizons Fall 2014